Germany: Looking For Scapegoats

As the country's economy reels, the politicians are demonizing private equity outfits

Few places have been hit harder by the decline of the German steel industry than Gelsenkirchen, a city of 271,000 in the Ruhr Valley where unemployment, at 26%, is among the worst in the nation. So when Franz Müntefering, chairman of the governing Social Democrats, likened foreign buyout artists to "swarms of locusts sucking the substance" from German companies, that was just what Alfred Schleu was yearning to hear. "It's about time someone told it like it is," says Schleu, local chief of IG Metall, the union that represents 2.4 million workers in industries such as steel and autos.

Popular hostility is escalating toward private-equity funds, which buy companies or subsidiaries and turn them around. Never mind that the Social Democrat-led government has itself bellied up to the private equity trough, which last year was worth $27.7 billion in Germany. Since 1998, the government has sold two businesses to New York-based Apax Partners Inc. -- Tank & Rast, a chain of Autobahn rest stops, and the Federal Printing Office. The attacks on foreign investors are not about facts so much as emotion. Most of all, they're a desperate attempt by Chancellor Gerhard Schröder's government to cater to red-meat, left-wing voters in North Rhine-Westphalia, Germany's most populous state, which includes Gelsenkirchen and hundreds of other hard-hit communities.

Schröder & Co. are desperate. Polls show the state will fall to the opposition Christian Democrats in May 22 elections, possibly bringing the end of Schröder's coalition government with the Green Party. "[The attacks] are coming from someone who has his back to the wall," says Peter Hammermann, Munich-based managing director of Barclays Private Equity Co. in Germany. In fact, Müntefering's critique of foreign capital doesn't go far enough for some on the hard left, who pelted him with eggs at a May 1 rally in Duisburg.

Some of the discourse has taken on a decidedly ugly tone. The phrases used by Müntefering are strikingly similar to the contents of a cover story in the May issue of IG Metall's house magazine, raising fears of a concerted campaign to demonize buyout firms. The cover illustration shows a bloated mosquito, dressed in a business suit and grinning fiendishly as he tips an Uncle Sam top hat. "U.S. Firms in Germany: The Bloodsuckers," reads the headline.

Few Germans are so extreme. But polls show widespread public anger toward companies and investors that are perceived as hungry for profit at the expense of jobs. The backlash could lead to attempts to slap a higher tax on private equity profits or impose licensing requirements on private equity professionals, which could be used as a tool to restrict them. "The population wants companies to be more responsible to society," says Richard Hilmer, managing director of Berlin pollster Infratest-Dimap.


The backlash is most visible in Germany, but there are stirrings in France, too. The French may reject the proposed new European Union Constitution in a referendum on May 29, not because of what the constitution says but out of protest against pressure from Brussels on all EU members to break down barriers to competition and allow free movement of labor. There is even a nascent attempt to blame foreign investors for France's slow growth. "The behavior of some of these funds is shocking for Europeans," says Bernard Carayon, a French parliamentarian who has proposed legislation restricting access to the capital of French companies. "They invest for two reasons: either to fire the company's workers, then chop it up, or because they want to capture our technology."

In Germany, the debate could have a chilling effect on private equity deals being explored by hundreds of family-owned companies. Already, German entrepreneurs are renowned for their reluctance to sell out to foreigners, even when it makes economic sense. "The rhetoric is very dangerous because it fosters resentment against management and enterprises," says Randolf Rodenstock, who beginning in 2003 sold lens and eyewear maker Rodenstock to Permira, ending more than a century of family ownership.

Why single out foreign buyout firms? It's true they have laid off workers and moved production to Eastern Europe or other lower-cost locations. But Germany's biggest job exporters are blue-chip names like Siemens (SI ) and Robert Bosch. More often, private equity has gone where no other investor dared. London-based Permira Advisers took a huge risk when, in 2003, it bought control of money-losing pay-TV company Premiere in a transaction estimated at $1.3 billion. "It was in a shambles," says Thomas Krenz, managing director of Permira in Germany. Premiere turned around and floated shares in Frankfurt in March. Under Los Angeles investor Haim Saban, German broadcaster ProSiebenSat.1 Media improved ratings and more than doubled its stock price while maintaining employment at nearly the previous level.

Private equity has also helped German companies restructure by providing a market for noncore holdings, often with beneficial effects for employees. Wincor Nixdorf, a former Siemens software and services unit, was floated on the Frankfurt exchange last year after a restructuring led by KKR. Wincor more than doubled its workers after KKR took over in 1999, to more than 6,000, mostly in Germany. Nor is it true that private equity is a U.S. game. More than 80% of private equity funding in Germany last year came from German investors such as banks and insurance companies, according to the German Private Equity and Venture Capital Assn.

But the anxiety-ridden German public is hardly open to nuanced argument amid stagnant growth, near-record joblessness, and declining social welfare benefits. So far, Chancellor Schröder has stayed in the background, and his party has not yet offered any proposals to back up Müntefering's rhetoric. On the contrary, it was only in March that Schröder proposed cutting Germany's corporate tax rate from 39% to 33% to help business become more competitive. Having fanned the flames, though, the Social Democrats will probably have to make at least a token show of curtailing the buyout firms. "We need incentives to create jobs, not incentives to make a quick buck," says union official Schleu. At the moment, it's hard to convince anyone in Germany that the two might go hand in hand.

By Jack Ewing in Frankfurt with Rachel Tiplady in Paris

    Before it's here, it's on the Bloomberg Terminal.